An Introduction to Matching with Incomplete

Information
Anthony Ding
Econ 182: Honors Market Design
Prof. Fuhito Kojima
June 4, 2014
1 Introduction
This paper is a continuation of a presentation given in class on Wednesday, May 21,
2014 under the same title. The focus of this paper will be to briey review the insights
shared in the presentation and discuss various models that have been proposed to model
incomplete information.
One of the rst papers that comprehensively explored the idea of incomplete infor-
mation was published in 1989 and written by Alvin E. Roth. This is the paper we will
explore rst and the paper that will make up the bulk of this review. While there have
been many important contributions in between, for the next paper, we will skip forward
to briey discuss the modeling aspects of a more recent paper by Qingmin Liu, George
J. Mailath, Andrew Postlewaite, and Larry Samuelson, published in 2014.
This review will begin st with a motivational section which discusses why we might
want to consider models of incomplete information in the rst place. It will then cover the
two papers introduced earlier and end with a summary of the results and key takeaways
from the current scholarship on matching with incomplete information.
2 Motivation
As mentioned before, we might ask ourselves why there is a need to model incomplete
information. Some of the the reasons why incomplete information models are interesting
and useful include the fact that they may be more realistic models of the real-world, that
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they raise strategic and behavioral implications that are otherwise reduced to assumptions
in the complete information model, and that they allow us to test the robustness of the
theories that arise from complete models.
To a certain extent, no model of the real world is truly complete and accurate and
in fact, parsimonious models often do a very good job of modeling out-of-sample results
without introducing too much complexity. The question, therefore, is: what can models
of incomplete information add? Let us consider a sub-class of mechanisms that we call
direct revelation mechanisms. These mechanisms ask individuals to report their indi-
vidual preferences. We will show later in why direct revelation mechanisms are important
and why we are able to focus on this particular subclass of mechanisms. In such cases,
we might imagine that the dierences between complete and incomplete information may
have a signicant impact as asking individuals to reveal their preferences introduces a
strategic decision which may depend on the information an individual has. In addition
to this motivation, models of incomplete information can test o-boundary results and
test the stability of results we obtain from complete information models.
Hopefully, we have convinced the reader that models of incomplete information are
interesting to study and can add signicantly to our understanding of complete informa-
tion models. The rst set of models we will look at were proposed by Alvin E. Roth in
1989.
3 An Early Model of Incomplete Information, 1989
This rst paper by Roth begins by reviewing complete information two-sided markets and
then moves on to construct a general framework of an incomplete matching model. Given
the nature of incomplete information games, Roth further explores notions of equilibrium
and dominant strategies and compares these to the complete information case. In the
following sections, we will take a closer look at the insights gained through this study
and in each step, we will explore the implications of these insights and raise a few open-
ended questions that will help motivate the second paper, published in March 2014, which
proposes an alternative model and type of incomplete information.
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3.1 A Model of Complete Information
In two-sided, complete information matching markets, we study the matchings and out-
comes of two groups. While we typically call two-sided matching markets marriage
markets and denote each side as man or woman, this does not necessarily have to be the
case. Some examples of other marriage markets include markets where students seek
to be matched with colleges or where tenants seek to be matched with landlords.
In the most general sense, however, we can consider two-sided matching markets to
be composed of two nite, disjoint, sets dened M = {m
1
, m
2
, m
3
, ..., m
n
} and W =
{w
1
, w
2
, w
3
, ..., w
r
}. We further assume that all individuals in this market have strict
preferences represented by P(m) and P(w), meaning that an individuals preferences
produce a rank-ordering over all possible matches in the set W {m} and M {w},
respectively. A matching is therefore a one-to-one correspondence from the set of all
individuals M W onto itself where (x) is dened as the match of individual x. In
this setting, we dene being matched with oneself, or self-matching, to mean that the
individual is unmatched. In addition, we call a matching stable if there is no individual
who is matched with an unacceptable match and no two individuals who would be able
to block the matching by exiting the market and forming a match on their own that is
preferred to their respective matches under .
The marriage market, therefore, can be seen as a three-tuple consisting of all men, all
women, and the vector of all individual preferences: (M, W, P). Now let us let the set
of preferences that men and women actually choose to reveal be the vector Q where Q
does not necessarily have to correspond to P. Recall that in the direct revelation games
that we introduced earlier, the action required of each player is simply to reveal his or
her preferences. Thus Q can be seen as a set of strategies that each player plays. Given
this, we dene a set of equilibrium strategies Q, to exist when Q(i) is individual is best
response to the strategies Q
i
played by the other players. Recall that an equilibrium
strategy is only dened over the particular set of strategies that other players play in
that equilibrium. This is dierent from a dominant strategy which is the best response
to every possible strategy that other players could play.
The following impossibility theorem arises from the market above,
THEOREM 1. When there are at least two agents on each side of the market, no stable
matching mechanism exists which always makes stating the true preferences a dominant
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strategy for every agent.
But the M-optimal stable mechanism, which is equivalent to the M-proposing de-
ferred acceptance algorithm, makes it a dominant strategy for each man to state his true
preferences. And likewise, the W-optimal stable mechanism makes it a dominant strat-
egy for each woman to state her true preferences. This is a rather nice result because
while we have seen that there is no stable mechanism where it is a dominant strategy
for every agent to state his or her true preferences, in the man- or woman-optimal case,
we can ensure that at least for the proposing side, stating true preferences is a dominant
strategy.
In fact, we can go further and state that the M-optimal stable mechanism is group
strategy proof for men and the W-optimal stable mechanism is group strategy proof for
women.
THEOREM 2. Let P be the true preferences of the agents, and let

P dier from P in
that some coalition

M of the men falsify their preferences. Then there is no matching ,
stable for

P, which is preferred to
M
by all members of

M.
So far, we have talked about dominant strategies for the proposing side of any stable
mechanism and neglected the receiving side. The following theorem shows that while the
receiving side may not have a dominant strategy, there are certain preference orderings
that dominate other orderings.
THEOREM 3. When the M-optimal stable mechanism is used, any strategy Q(w) in
which w does not list her true rst choice at the head of her list is dominated by the strategy
Q

(W) which does list her true rst choice rst, but otherwise leaves Q(w) unchanged.
This concludes Roths discussion about dominant strategies and we see that the com-
plete information model gives us a rather nice set of strategies or rules of thumb that
both the proposer and the receiver can employ. The following discussion is on equilib-
rium strategies. While Roth draws attention to three main theorems on equilibrium in
complete information markets, we will focus on one in particular.
THEOREM 4. Suppose each man chooses his dominant strategy and states his true
preferences, and the women choose any set of strategies (preference lists) P

(w) that
form an equilibrium for the matching game induced by the M-optimal stable mechanism.
Then the corresponding M-optimal stable matching from (M, W, P

) is one of the stable

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matching of (M, W, P).
In some sense, it may be hard to believe that there is such a nice result as this. The
theorem essentially states that in any equilibrium in the M-optimal stable mechanism
where men report their true preferences, regardless of what preferences women report,
the stable outcome to the match is stable with respect to true preferences as well.
This ends Roths discussion of complete information games. To recap, here are some
of the important results that weve shown for complete information games:
Dominance. (1) In the M- and W-optimal stable mechanisms, truth telling is always
a dominant strategy for the proposing side. (2) In the M- and W-optimal stable mecha-
nisms, listing the true rst choice rst dominants any identical preference ranking where
the true rst choice is not listed rst for the receiving side.
Strategy Proofness. In the M- and W-optimal stable mechanisms, the outcomes are
group strategyproof for the proposing side.
Equilibrium. When the proposing side plays its dominant strategy and the receiving
side responds with an equilibrium strategy, the resulting stable matchings are stable with
respect to true preferences.
Keeping these results in mind, let us now look at a formulation of an incomplete
information game.
3.2 A Model of Incomplete Information
Roth denes an incomplete information matching game as the ve-tuple:
= (N = M W, {D
i
}
iN
, g, U = X
iN
U
i
, F)
Here, N represents the set of all individuals in the market. {D
i
} is the set of all
the strategies or decisions that the individuals make, g is function that maps actions to
outcomes, i.e g : X
iN
D
i
L[M], U is the set of each individuals utility functions, and
F is the probability distribution over all possible vectors of utility functions.
The particular type of incompleteness being modeled here is one in which individuals
are unsure of other individuals utilities but where individuals have some probabilistic
belief about the utilities of others. To further clarify the model, we can represent a
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complete information model when distribution F gives a probability of one to a single
vector of utilities and a probability of zero to the rest.
To be clear, there is information incompleteness not in the sense that individuals are
unsure of the quality or payo they will get when matched. Because players know their
own utility functions, they have a clear and complete picture of their exact payo when
being matched to each possible matching. The information incompleteness arises in the
preference rankings of other players. Which is to say: the matching outcome does not
depend on the type of the individual, it depends only on the individuals actions. While
this may not seem like the most straight-forward way to model incomplete information,
we can imagine that this type of incomplete information exists in elite hiring markets.
The particular example that Roth uses is the medical intern market where the qualities
of every intern is well known to the hospitals but how the interns will rank the hospitals
is not known. This is not the only type of incomplete information that can be modeled
as we will see in the next paper.
Next let us dene a strategy to be a mapping from an individuals type to a de-
cision, i.e.
i
: U
i
D
i
. Because of the incomplete information assumption, a set of
strategies will result in a lottery over all possible matchings, making it possible to dene
an individuals utility as an expected utility:
u
i
(
i
) =
u
i
U
i
p
i
(u
i
|u
i
)u
i
[g((u
i
, u
i
))]
Here, the conditional probability for each vector of other individuals utilities u
i
can be
calculated by each individual using Bayes rule. These probabilities weight the utilities of
the outcomes. In this case, maps from types strategies and g maps from strategies
outcomes. Let us dene to be a set of equilibrium strategies.
The proofs of some of the following results depend on the revelation principal, which
we dene below. To begin with, we make the claim that for any general game with
equilibrium , the corresponding revelation game is
R
(). In addition, we dene the
[{D
i
}
iN
, g] to be the mechanism and [U, F] to be the state of information.
REVELATION PRINCIPLE.
1. Truth telling is always an equilibrium
2. When all players tell the truth in
R
(), the resulting lottery over matchings is
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the same as that when the players play the strategies in .
Given the revelation principle, we introduce the following theorem,
THEOREM 5. If there are at least two agents on each side of the market, then for any
general mechanism [{D
i
}
iN
, g] there exists states of information [U, F] for which every
equilibrium of the resulting game has the property that g((u)) L[S(u)]. That is,
there exists no mechanism with the property that at least one of its equilibria is always
stable with respect to true preferences at every realization of the game.
Notice that THEOREM 4 guaranteed that in the complete information case, any
equilibrium in which men played their dominant strategy would be stable with respect
for true preferences and THEOREM 5 states that in the incomplete information case,
there exists no mechanism in which at least one of its equilibria is stable with respect to
true preferences. In other words, with regards to stability and equilibria in the incomplete
information games, we get the exact negation of the theorem we proved in the complete
information cases.
In addition, another result that Roth provides is,
THEOREM 6. In games of incomplete information about preferences, the M-optimal
stable mechanism may be group manipulable by men.
Again, let us compare this result with its complete information counterpart, THEO-
REM 2, which states that the M- and W-optimal stable mechanisms are group strategy
proof for the proposing side. THEOREM 6, however, tells us that under incomplete
information, there are some cases in which the M-optimal stable mechanism is group
manipulable by a coalition of men. Roth proves the aforementioned result with an ex-
ample in which a coalition of men can protably manipulate their outcomes through the
M-optimal stable mechanism.
Roth then proves that despite the fact that equilibrium and stability results cannot
generalize well to the incomplete model, notions of strategic dominance do generalize
well: in an incomplete information setting, it is still a dominant strategy for men to
report their true preferences under an M-optimal stable mechanism and in response and
listing the true rst choice still dominants an identical matching without listing the true
rst choice for women.
These results conrm the signicance of incomplete information modeling. To a cer-
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tain extent, if we are concerned about stability and equilibrium strategies, we can ob-
tain very inconsistent matching outcomes depending on whether we choose to model the
particular market we are studying as a complete information market or an incomplete
information market. However, there is also a sense in which some may claim that Roths
model is a little too specic to certain types of markets. The main concern seems to
be the assumption that individuals in Roths incomplete information model know their
own utility function with complete accuracy. Knowing your own utility function implies
that you know the qualities of each possible match and you know your utility from being
matched with each person. In the paper, Roth justies this assumption by claiming that
this is indeed true in elite job placement markets. This is certainly a fair justication
and we can imagine this model being a rather accurate representation of such scenarios.
However, we might also ask how we can generalize this model so that it is perhaps a little
more applicable to more common markets?
This is one of the motivations behind the next paper we discuss.
4 Incomplete Information Revisited, 2014
As mentioned before, we will not cover this second paper in as much depth as we covered
the rst paper. While there are certainly some extremely important insights presented in
this paper, we narrow our focus to the models used and discussed and the requirements
for stability that are introduced.
4.1 The Model
As discussed earlier, this new model proposed by Liu, Mailath, Postlewaite, and Samuel-
son, attempts to model a dierent type of incomplete information. The motivating real-
life scenario is a market with rms and workers. In this case, the quality of the rms
is public knowledge and known to all of the workers. This appears to be a realistic as-
sumption as public rms often release quarterly nancial statements and are covered in
news reports which are scrutinized highly by potential workers. On the other hand, the
quality of workers is not public knowledge.
The model rests primarily on the beliefs of the rms. The basic idea is that rms
make inferences based on the information that they have access to and the lack of any
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movement in the market. Firms then form inferences based on this set of foundation
inferences and continue to reason until they eventually arrive at a set of what the authors
dene as reasonable beliefs. It is through this process of iterated inferences that rms
are able to come up with beliefs about the qualities of all the workers in the market.
The initial formation of these beliefs rests on the fact that rms begin formulating
inferences when they notice stability in the market in the sense that there is no move-
ment of workers among rms. While the paper does not mention this specic term, we
nd it easier to describe as a kind of observational stability in the sense that rms can
reasonably infer that there is no blocking pair if workers are not leaving their jobs to
contract with other rms.
Now that we have described this model with words, let us actually take a look at the
actual model itself.
To begin with, we assume that there are two sets of individuals, individuals i I
and rms j J. Each worker and each rm have a type and functions f : J F and
w : I F that maps an individual to a type. Each match generates its own value, called
the premuneration value, to the worker, v
wf
, and to the rm
wf
. We can imagine this
value to both the worker and the rm as human capital and accumulated knowledge for
the worker and the workers eort and productive output for the rm.
In addition to this premuneration value, there is also a transfer from the rm to the
worker, p, which represents a payment. Thus, we can model both the workers and the
rms payos:

w
i
= v
w(i),f(j)
+p

f
j
=
w(i),f(j)
p
4.2 Stability
Stability is dened as usual, which is to say a matching is stable if it is 1. individually
rational and 2. there is no blocking pair. Stability is dened by Liu, Mailath, Postlewaite,
and Samuelson in the language of the model as such:
Given a nonempty set of individually rational matching outcomes, , a matching
outcome (, p, w, f) is -blocked if there is a worker-rm pair and payment satisfying
1. v
w(i),f(j)
+p > v
w(i),f((i))
+p
i,(i)
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2.
w

(i),f(j)
p >
w

1(j)),f(j)
p

1(j),j
for all w

satisfying:
(a) (, p, w

, f)
(b) w

1(j)) = w(

1(j))
(c) v
w

(i),f(j)
+p > v
w

(i),f((i))
+p
i,(i)
A matching outcome (, p, w, f) is -stable if it is not -blocked.
Condition 1 and 2 make intuitive sense as they state that an individual worker or
rm must be better o in the block than in his matching allocation in order to form a
blocking pair. The set represents all reasonable beliefs, which are dened in (a)-(c). (a)
states that the matching must be consistent with set , which represents all individually
rational matching outcomes. (b) states that the assignment cannot contradict with what
the rm already knows at the current state. (c) states that the match must be incentive
compatible for the worker and must be a better match for him or her.
5 Summary and Conclusions
Now weve seen two dierent ways in which incomplete information can be modeled.
The rst, a model developed by Roth, demonstrates that the element of randomness
that is introduced when individuals do not have complete information about each others
preferences leads to negations of theorems we proved in the complete information case
about equilibrium and stability conditions. However, this unfortunate result is somewhat
tempered by the fact that, at the very least, many of our conclusions about dominant
strategies still generalize nicely to the incomplete information. This rst paper establishes
the concept of incomplete information matching and shows us, with a general model, why
these types of models are interesting and important to study.
Answering the open question posed by Roth with regards to the modeling specics
of incomplete information, Liu, Mailath, Postlewaite, and Samuelson provide a collection
of conclusions about incomplete information based o of an intuitive model built upon
inferences and leveraging information about the status quo to construct a set of higher-
level beliefs. While the bulk of those conclusions are not covered in this review, it is highly
encouraged that the reader take a look at the paper as it raises some very interesting
points about stability and price-sustainable outcomes.
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References
[1] Liu, Q., Mailath, G.J., Postlewaite, A., and Samuelson, L. (2014). Stable Matching
with Incomplete Information, Econometrica, 82, 541-587.
[2] Roth, A.E. (1984). Two-Sided Matching with Incomplete Information about Oth-
ers Preferences, Games and Economic Behavior, 1, 191-209.
[3] Gale, D., Shapley, L. (1962). College Admissions and the Stability of Marriage,
American Math Monthly, 69, 9-15.
[4] Shapley, L.S. and Shubik, M. (1972). The Assignment Game. I. The Core, Inter-
national Journal of Game Theory, 1, 111-130.
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